By John Spence & Tom Lydon
The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) fell to a fresh record low on Monday despite concerns over the Cyprus bailout as the country's banks remained closed to prevent a run.
The exchange traded product lost more than 1% on Monday even though the CBOE Volatility Index, or VIX, rose 1.3%. The disparity is a reminder that VXX and other volatility-linked products are designed to track VIX futures contracts, not the spot price investors see quoted. The VIX is known as Wall Street's fear gauge.
VXX is down 70% for the trailing 12 months as the exchange traded note has been clobbered by a falling VIX and "contango" in VIX futures. Volatility products are designed to "roll" the contracts over periodically to maintain exposure to VIX futures. They can lose money on this trade when longer-dated contracts are more expensive than the front-month contract, or when markets are said to be in contango.
VXX has fallen 35% year to date, yet the ETN has seen net inflows of $569 million, according to IndexUniverse.
The VIX itself started the year around 18 and recently fell below 12 for the first time in six years, while the index has averaged 25.8 from 2008 through 2012, The Wall Street Journal reports.
"The VIX has sustained low levels during prior bull markets. From early 2003 through mid-2007, a time during which the S&P 500 rose about 33%, the VIX averaged 14.4," according to the WSJ story. "Yet there are many market watchers who argue that the lack of volatility will prove fleeting and that investors are being lulled into a false sense of security."
The VIX is "not at all oversold and that is important if this rally is to resume," says Investors Intelligence technical analyst Tarquin Coe, adding that the 14-day Relative Strength Index (RSI), a momentum indicator, has a neutral reading.
"The lack of complacency as equity markets sit at long-term highs is bullish and will allow for further gains," Coe wrote in a newsletter. "The euphoria, or even optimism, typically seen at market tops is absent, a strong clue that the rally has further to go. The S&P 500 is expected to soon reassert and again attempt a record high."